We used it for daily builds of DLL's and the like. It gave us a way to keep binaries with the code without taking up a lot of space in the VSS database. You could check it out to keep it from being overwritten when you needed that. It also allowed us (the developers) to manage the folder structure, security, etc. instead of the network folks. Other than that, it was pretty-much the same as a network folder.

Yes, but Visual SourceSafe had an option to store only the most recent version of a binary file, which was a great feature.

Not everything can be merged...SSIS for example.